TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 58
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.... and subsequently, the same was selected for scrutiny. During the course of hearing, the Assessing Officer noticed certain facts and based on that, a show-cause notice along with questionnaire under section 142(1) dated July 8, 2010, was issued. The assessee filed the reply to the said notice. After considering the reply of the assessee, the Assessing Officer found certain claims of the assessee not tenable. 5. Out of those certain claims, one of the issues is against the addition of Rs. 1,03,12,934 under section 2(22)(e) of the Act, which is the dispute in the present appeal. The facts relating to this issue are as follows. 6. The Assessing Officer vide show-cause notice dated December 9, 2010, asked the assessee to explain as to why loan of Rs. 1,03,12,934 taken from M/s. Sindhu Trade Links Ltd. (hereinafter "STLL") be not treated as deemed dividend in view of the facts that directors of the assessee- company are substantially interested in the said companies and also some of the shareholders are common in both the companies. In response, the assessee furnished the facts stating that section 2(22)(e) is not applicable to the assessee-company, which are reproduced hereunder : ....
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....d in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; (ii) Although the STLL has claimed that the equity shares of the company is listed on Delhi Stock Exchange and Jaipur Stock Exchange, but in para 13 of the director's report itself, it has also been mentioned that these shares were not traded during the year under review. (iii) As per para 5 of the director's report, the company has not invited or excepted any public deposit within the meaning of sections 58A and 58AA of the Companies Act, 1956 and section 45-I(bb) of the Reserve Bank of India Act, 1934, during the year under review. The company does not hold any public deposit as on date and will not accept the same in future without the prior approval of the Reserve Bank of India in writing. (iv) The authorised representative vide letter dated December 13, 2010, has furnished shareholding pattern of STLL as on March 31, 2008. It is seen from there that though the authorised representativ....
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....ould not be applicable and come to the rescue of the assessee-company insofar as invoking section 2(22)(e) was concerned. According to the Assessing Officer, the onus was on the assessee to prove that STLL was a widely held public limited company in which the public were substantially interested and the onus was also on the assessee-company that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person and held that the assessee failed to discharge its onus and the Assessing Officer countered the submissions of the assessee that the STLL was an NBFC and therefore the deeming provision of section 2(22)(e) would not be applicable by giving the following reasons : "The Income-tax Act provides certain exceptions with respect to the provision of deemed dividend. This has been laid down in saving clause (ii) of section 2(22) of the Income-tax Act, which has been reproduced herewith- but 'dividend' does not include- (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the busines....
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....le to widely held companies : Section 2(22)(e) uses the words : any payment by a company 'not being a company in which the public are substantially interested' meaning thereby that section is applicable only to companies which are commonly known as closely held companies. Section 2(18) of the Act reads as under : '(18) "company in which the public are substantially interested"-A company is said to be a company in which the public are substantially interested- (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely : (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;' It was vehemently argued that these conditions are fulfilled by the lender companies and hence they are companies in which the public are substantially....
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....y interested, rather it was a company which was closely held by the promoter Mr. Sindhu and his family members and therefore the saving clause (ii) of section 2(22) of the Act would not be applicable and come to the rescue of the assessee- company insofar as invoking section 2(22)(e) was concerned. The learned Departmental representative submitted that the assessee failed to prove the onus that STLL was a widely held public limited company in which the public were substantially interested and that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person. He also submitted that the assessee has failed to prove that the STLL was an NBFC, therefore, the deeming provision of section 2(22)(e) would be applicable. He, therefore, submitted that the loans are nothing but deemed dividend and is liable to be taxed in the hands of the assessee and in this regard, he made reference to the various judicial pronouncements relied upon by the Assessing Officer. 13. The learned authorised representative for the assessee reiterated the submissions made before the learned Commissioner of Income-tax (Appeals) and for the....
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....after in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; But 'dividend' does not include- (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; The assessee-company submitted the interpretation of the section point-wise vis-a-vis observation of the learned Assessing Officer as follows : 1. Section 2(22)(e) : Shareholding conditions not applicable Section 2(22)(e) of the Income-tax Act, 1961, is attracted when a shareholder having shares not less than 10 per cent. receive any advance or loan from such company or any concern receive any advance or loan from such company in which a shareholder holding more than 10 per cent., also holds substantial interest, i.e., 20 per cent. shareholding in the concern who received the loan. From the balance-sheet as on March 31, 2008-Investment schedule of the assessee-company (copy enclosed) and shareholdi....
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....Officer : a. The learned Assessing Officer has observed on page 10-paras (ii) and (iii) that for STLL, in the director's report, it has been stated that shares were not traded during the year and also further stated that company has not accepted the public deposits. b. The learned Assessing Officer observed at page 11 that STLL has claimed that it is a listed company but no evidence has been provided regarding that it continues to be listed at stock exchanges and has not been suspended or de-listed. c. The learned Assessing Officer observed at page 13 that nearly 59 per cent. shareholding is controlled by its directors, family members. Hence with the above allegations, the learned Assessing Officer remarked that the STLL is not a company in which 'public is a substantially interested'. Submission before your good self against the learned Assessing Officer's observation : The assessee-company replied to the observations made by the learned Assessing Officer point-wise : a. Trading of shares and acceptance of public deposit are no parameters to check whether a company is a widely held company or not. It is section 2(18) definition which should prevail wh....
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....ding for a listed company : '19. Requirements with respect to the listing of securities on a recognised stock exchange. (2) Apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that : (b) At least 10 per cent. of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted subject to the following conditions : (a) minimum 20 lakhs securities (excluding reservations, firm allotment and promoters contribution) was offered to the public ; Provided that if a company does not fulfil the conditions, it shall offer at least 25 per cent. of each class or kind of securities to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted.' Since the assessee-company is in compliance of this rule, allegation that controlling 59 per cent. of the shareholding in the assessee- compa....
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....s (inter corporate deposits (ICD)) will fall under the deeming provision under section 2(22)(e) of the Act or not. We find that section 2(22)(e) excludes public company "not being a company in which the public are substantially interested". Section 2(18) of the Act defines companies in which the public are substantially interested. As per the said definition, a company is said to be a company in which the public are substantially interested, if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956) and the conditions specified either in Item (A) or in item (B) are fulfilled, namely : "(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder." 15. We find that the assessee before the Assessing Officer and the learned Commissioner of Income-tax (Appeals) has submitted that both these companies are public limited companies and they have prod....
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....etails of the same and to confirm whether shares had been allotted in its name or not and he further show caused as to in the case of non-allotment of such shares why not an appropriate rate of interest be charged thereupon in view of the facts that it is bearing an interest burden of Rs. 16,15,903 apart from bank charges of Rs. 47,906. He further observed that the assessee had made a veiled attempt to show that it was not bearing any interest burden due to amount paid as share application money. After observing the assessee's contention and the details furnished, the Assessing Officer found that the assessee had given loans and advances of Rs. 14,03,24,434 and out of which, an amount of Rs. 9,86,87,800 had been expressly shown as loans and advances in the balance-sheet although in the latter details the assessee had shown it in the garb of share application money but it had failed to discharge its onus that these advances were in the ordinary course of business of the assessee-company. The Assessing Officer observed that since the assessee was not in the business of finance and it was also not a NBFC company it could not be said that it had advanced this much huge amount in th....
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....e assessee-company submitted that the learned Assessing Officer has made the following allegations : Allegation No. 1 : The assessee-company has failed to discharge its onus that advances were in ordinary course of business of the assessee- company. (page 3 of the assessment order) Reply to allegation : Being private limited company, there is no bar on to it that it cannot give advances in the form of share application money or advances to other parties to pursue to strategic goals by making investments in other companies. Allegation No. 2 The assessee-company has failed to substantiate as to whether the money advanced in the garb of share application money will give any income to the assessee-company in the ordinary course of business. The assessee-company has not shown any return on income/interest on these amounts. (page 3 of the assessment order). Reply to allegation : The investment are generally made to gain in strategic manner in long term, out of which capital gain will accrue and will be taxed at prevailing rates of that particular time. Investments are not like advances which will start earning interest from the day one. Each and every financial product ha....
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..... Reliance is placed on CIT v. Hotel Savera [1999] 239 ITR 795 (Mad), wherein the hon'ble Madras High Court has held that once it is established that the assessee-company is having sufficient free funds, presumption would always be made that advances to third parties have been made out of own free funds. Further the assessee-company submitted that where there are both borrowed funds as also interest-free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal). It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC). Further reliance in this regard is placed on CIT v. Reliance Utilities and Power Ltd., I. T. A. No. 1398 of 2008 (Mumbai High Court) pronounced on January 9, 2009 [2009] 313 ITR 340 (Bom). (Copy of judgment placed on record). Hence the assessee-company pleaded disallowance made of interest shall be deleted since the appellant-company has utilised borrowed ....
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....rned Commissioner of Income-tax (Appeals), the assessee has not taken any steps to get back this amount which has been invested in the assessment years 2007-08 and 2008-09 and held that it was a blatant diversion of funds under the guise of share application money. Before us, the learned authorised representative took our attention to the following facts which are revealed by perusal of balance-sheet as on March 31, 2008, which is as below : Following is the shareholders fund position of the appellant-company as on March 31, 2008 : (Rs.) Paid-up share capital 2,62,00,000 Share premium 2,34,00,000 Profit and loss account 62,84,839 Share application money 28,88,00,000 Total shareholder fund available without interest burden 34,46,84,839 24. A perusal of the above reveals that the assessee-company had sufficient funds to the tune of more than Rs. 34.46 crores whereas the share application money invested as on March 31, 2008, only at Rs. 9.28 crores which is only 28.63 per cent. of the total shareholder funds. Thus, we note that the assessee-company has sufficient free funds for making advances/investment out of its own shareholder funds without incurring any inter....